CHAPTER: WORKING CAPITAL MANAGEMENT

Exercise 1:
High-Rise Building Company uses 400,000 tons of stone per year. The carrying
costs are $100/ton. The cost per order is $500. Calculate the economic order
quantity per order, the optimal number of orders per year, the optimal annual order
costs, the optimal carrying costs and the total costs of optimal inventory.
Exercise 2:
A supplier offers you credit terms of 1.5/10, net 30. What is the cost of forgoing the
discount on a $2,200 purchase?
Exercise 3:
A supplier offers you credit terms of 3/15, net 45. What is the cost of forgoing the
discount on a $318,400 purchase?
Exercise 4:
Supposing you purchase goods on terms of 1/10, net 60. Taking compounding into
account, what annual rate of interest is implied by the cash discount? (Assume a
year has 365 days.)
Exercise 5:
The Co. currently has debt with market value of $400 million outstanding. The debt
consists of 8 percent coupon bonds which have a maturity of 10 years and are
currently priced at $1,240 per bond. The firm also has an issue of 2 million preferred
shares outstanding with a market price of $11.00. The preferred shares pay an annual
dividend of $1.30. Imaginary also has 12 million shares of common stock outstanding
with a price of $15.00 per share. The firm paid $1.80 common dividend, and that
dividend is expected to increase by 6 percent per year forever. If Imaginary is subject
to a 35 percent marginal tax rate, then what is the firm’s weighted average cost of
capital?

Exercise 6:
A customer has ordered goods with a value of $800. The production cost is $600.
Under what conditions should you extend credit if there is no possibility of repeat
orders?
Exercise 7:
A customer has ordered goods with a value of $2000. The production cost is $1800.
Under what conditions should you extend credit if there is no possibility of repeat
orders?
Exercise 8:
Terry's Place is currently experiencing a bad debt ratio of 4%. Terry is convinced
that, with looser credit controls, this ratio will increase to 8%; however, she expects

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sales to increase by 10% as a result. The cost of goods sold is 80% of the selling
price. Per
$100 of current sales, what is Terry's expected profit under the proposed credit
standards?
Exercise 9:
The default rate of Don's new customers has been running at 20%. The average sale
for each new customer amounts to $500, generating a profit of $200 and a 30%
chance of a repeat order next year. The default rate on repeat orders is only 5%. If
the interest rate is 6%, what is the expected profit from each new customer?